macro economic and monetary developments - first quarter review 2011-12

8/3/2019 Macro Economic and Monetary Developments - First Quarter Review 2011-12

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July 25, 2011

RESERVE BANK OF INDIA

Macroeconomic andMonetary Developments

First Quarter Review 2011-12

Issued with the First Quarter Review of

Monetary Policy 2011-12


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Macroeconomic and

Monetary Developments

First Quarter Review 2011-12

Reserve Bank of India

Mumbai


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Contents

Overview i - iii

I. Output 1 - 7

II. Aggregate Demand 8 - 12

III. The External Sector 13 - 19

IV. Monetary and Liquidity Conditions 20 - 27

V. Financial Markets 28 - 36

VI. Price Situation 37 - 45

VII. Macroeconomic Outlook 46 - 50


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1. Drivers of inflation changed over the

course of 2010-11. With evidence emerging that

not only did headline inflation persist at around

9 per cent, but that it had become generalised

with significant price pressures in non-food

manufacturing since December 2010, monetary

policy was tightened more aggressively.

Following up on a series of rate hikes through2010-11, policy rates were raised by 75 bps in

Q1of 2011-12, through a 50 bps hike in May

and 25 bps in June. Altogether, in a span of 15

months starting March 2010, operational policy

rates were raised by 425 bps one of the sharpest

monetary tightenings seen across the world.

2. Monetary transmission improved further

during this quarter. In response to the monetary

tightening, most banks raised their deposit and

lending rates. As a result, deposit growth picked

up and credit growth decelerated, though it

remained above the projected trajectory. Also,real lending rates remained positive despite

high inflation. These dynamics helped limit the

overheating pressures in the economy. However,

inflationary pressures have persisted due to a

series of supply-side shocks that spilled over in

the face of strong demand stoking generalised

inflation. While growth has showed some signs

of softening in Q1 of 2011-12, it is likely to stay

around the trend. Inflationary pressures are

likely to stay, if not intensify, in Q2 of 2011-12,

before moderating.

Global Economic Conditions Recovery at risk with global growth

entering soft patch

3. Globally, the momentum of recovery

appears to be stalling. High oil and commodity

MACROECONOMIC AND

MONETARY DEVELOPMENTS

FIRST QUARTER REVIEW 2011-12

Overview

prices, the Middle East political strife, Japanese

earthquake, sovereign debt problems in the Euro

zone and the impasse on the fiscal and debt

problems in the US have taken a toll on

economic activity and business as well as

consumer confidence.

4. In its June 17, 2011 update of the World

Economic Outlook, the IMF marginally

lowered its global growth projection for 2011

to 4.3 per cent from 4.4 per cent. The IMF

lowered the estimate for advanced economies

by 0.2 percentage points, but projected that

growth in most emerging and developing

economies will stay. It also retained its growth

forecast for India at 8.2 per cent at market

prices corresponding to 8.0 per cent at factor

cost.

Inflation surprise in advanced economies

increases global risks

5. Global inflation is rising rapidly. The IMF

revised its 2011 consumer price inflation

forecast for advanced economies upwards by

0.4 percentage points. There are indications that

inflation may start cooling off in some key

emerging market economies. However, the

wedge between producer price and headline

consumer price inflation, as also between the

latter and the core inflation component have

widened disconcertingly. This has triggered a

debate over how much longer advanced

economies can defer an exit from an excessively

accommodative monetary policy stance. The

ECB has already raised policy rates twice this

year, but policy dilemmas are palpable

elsewhere.


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Macroeconomic and Monetary Developments First Quarter Review 2011-12

ii

6. Unemployment i s proving to be

intransigent to policy action, and with growth

relapsing amidst increasing fiscal and debt

burdens, the fragility of global recovery and its

vulnerability to macroeconomic shocks remains.

Indian Economy: Developments andOutlook

Output

Signs of moderation after acceleration in

2010-11

7. Growth showed signs of some moderation

during Q1 of 2011-12 after it reverted to the

recent trend in 2010-11. Signs of moderation

were visible from deceleration in IIP growth in

April-May, poor performance of certain core

industries, especially cement and natural gas

and consumption deceleration in cement, steel

and automobiles. Manufacturing and services

PMIs also show that growth is turning softer.

Even as some deceleration is expected in 2011-

12, overall growth is likely to stay around trend

growth of about 8 per cent in the face of still

strong consumption demand. The monsoon may

be close to normal and services sector

momentum has been maintained.

Aggregate demand

Investment demand slows down, private

spending still strong

8. Aggregate investment dipped in H2

of 2010-11 and is yet to show signs of

improvement. Corporate investment intentions

in projects that received financial assistance

dropped by 43 per cent sequentially during the

second half of the year. Private consumption

demand remains strong but is adjusting

downwards. Corporate sales growth remained

strong during Q4 of 2010-11 and is expected

to retain the pace in Q1 of 2011-12. Profits,

however, have been impacted by margin

pressures from high interest rates and raw

material costs. A rebalancing of demand from

government consumption to private investment

is necessary in 2011-12. This rebalancing will

require shifting of government expenditure

from revenue expenditure to capital

expenditure, beyond what has been envisaged

in the budget. Reduction in subsidies through

better targeting is also needed. Despite recent

initiatives to scale down subsidies, there is

likelihood of a fiscal slippage in 2011-12. In

face of decelerating investment, improved

project execution and governance can also

help in improving investment demand.

External sector

Trade diversification, invisibles turnaround

help moderate CAD

9. A signif icant p ick-up in exports,

supported by a strategy of trade diversification

in composition and direction, and strong

software services exports, helped in moderatingthe CAD during 2010-11. Going forward, CAD

is expected to remain manageable. However,

risks to current account persist from a slowdown

in global growth. Risks to capital account arise

from rising sovereign debt risks in the Euro zone

and the uncertainties on in the US debt ceiling.

10. FDI flows have picked up in 2011-12 so

far. Portfolio flows have started to rise again

since the last week of June. The inflows at the

current rate can be absorbed by the CAD, but

it is necessary to adjust the structural balance

of flows by attracting larger FDI inflows.Monetary and Liquidity Conditions

Tight monetary and liquidity conditions

bringing desired adjustment

11. Liquidity conditions, though still in a

deficit mode, have eased during the first quarter

of 2011-12. The increase in deposit rates by

banks helped deposit growth to pick-up, which

eased the structural liquidity gap. The runaway

growth in currency has also been arrested

consequent to the rising opportunity cost of

holding cash. Reserve money growth

decelerated with low primary liquidity creation,

but monetary growth increased with

accelerating time deposit growth. Credit growth

decelerated during the quarter, but remains

above the indicative trajectory.


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iii

Overview

Financial Markets

Indian markets see range bound

fluctuations, amidst low volatility

12. Notwithstanding the firming up of interest

rates, there has been no stress visible across

the financial markets. Financial asset prices

have shown low volatility. Conditional volatility

in equity prices that had dropped significantly

after the global financial crisis continued to be

low during Q1 of 2011-12. Exchange rate

movements remained orderly obviating the need

for interventions. The yield curve flattened,

largely in response to policy rate hikes. Property

prices and volume of transactions were on the

upswing after a subdued movement in Q3 of

2010-11.

Price Situation

Generalised inflation with near-term

upside risks do not provide any comfort

13. Inflation became generalised in Q4 of

2010-11 and has remained unchanged in

trajectory as also in composition in 2011-12 so

far. This was in line with the Reserve Banks

projections. While some revision in fuel prices

hike was factored in the projected path of

inflation, the pass-through is yet incomplete

which will keep up the near term pressure. Thesoftening of global commodity prices since May

2011 may provide some relief in the short run,

but price pressures will persist as a result of a

combination of demand side factors and

structural drivers. Food inflation may not soften

much even with a normal monsoon as the

increase in MSP will provide a higher floor to

food prices. Electricity prices are yet to reflect

the rising input costs. Near term trends on non-food manufacturing inflation will be critical in

shaping the future macroeconomic dynamics.

Macroeconomic Outlook

In the midst of downside risks to growth,

inflation stays above comfort level

14. Monetary and liquidity conditions have

remained tight in the wake of inflation

persistence. The anti-inflationary monetary

policy stance adopted by the Reserve Bank since

October 2009 continued well into the first

quarter of 2011-12 as inflation persisted beyond Reserve Banks comfort level. Inflationary

pressures, which initially emanated from supply

side constraints, spilled over to wages and

output prices as demand conditions remained

buoyant. Currently, inflationary expectations

are further feeding on themselves and warrant

a close watch. While consumer demand

remains strong, higher input costs and increased

cost of borrowing are now eroding profit

margins impacting the pricing power of

corporate. On the other hand, indications of

moderation in growth have surfaced, makingthe policy challenge even more complex.

However, the persisting high inflation and its

expected slow decline warrant that the Reserve

Bank continue with its anti-inflationary policy

stance.


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Growth shows signs of moderation

I.1 Signs of moderation in growth have

emerged lately. Sequentially, growth had

decelerated in each quarter of 2010-11, though

it still remained close to trend in the fourthquarter. The new base Index of Industrial

Production (IIP) decelerated during April-May

2011. Core infrastructure industries growth also

moderated, mainly on account of a decline in

natural gas and cement production and subdued

growth in coal production. Automobile sales

witnessed moderation during Q1 of 2011-12.

The manufacturing PMI has dipped to a nine-

month low in June 2011, but still suggests a

strong month-on-month expansion in industrial

output. The services PMI also indicates an

expansionary mode but the readings in Q1 of

2011-12 were slightly lower than the precedingquarter. Cement dispatches and steel

consumption were slack during Q1 of 2011-12.

Notwithstanding some moderation, growthis likely to be near trend

I.2 As indicated in the Monetary Policy

Statement of May 2011, growth is likely to

decelerate in 2011-12 but stay close to the trend.

The Policy Statement had placed the baseline

projection at around 8.0 per cent, with a 90 per

cent probability of it falling in the 7.4-8.5 per

cent range. Though the downside risks

have since increased, growth is still likely tostay near the trend. Even as there is some

evidence of deceleration in interest-rate

sensitive sectors (viz., sales of automobiles and

commercial vehicles), credit growth remains

I. OUTPUT

strong on a deseasonalised basis. House

prices and transactions firmed up during Q4 of

2010-11.

I.3 In 2010-11, the growth at 8.5 per cent was

supported by a strong performance of theagriculture sector. While GDP growth in

2010-11 was near trend, non-agricultural GDP

growth was below trend (Chart I.1).

I.4 Year-on-year quarterly growth rates of

GDP declined during successive quarters of

2010-11 (Table I.1). As the revised IIP index

has not yet been incorporated in the quarterly

GDP data, these numbers could see some

upward revision. The sharp deceleration during

Q4 of 2010-11 was mainly on account of the

base effect as concomitantly the GDP estimate

for Q4 of 2009-10 was revised upwards

substantially. Notwithstanding the near-trend

growth in 2010-11, some moderation in

growth is expected in 2011-12. The downside

risks emanate from slightly below normal

monsoon forecast for the year, uncertain global

economic environment, high inflation and the

impact of past monetary actions to curb

aggregate demand.

Monsoon starts well, expected to weakenahead

I.5 The agricultural sector emerged as the key

driver of growth in 2010-11. As per the Fourth

Advance Estimates, there was record production

of foodgrains in 2010-11 (Table I.2). During

2011-12, agricultural growth may be lower on

account of high base and some monsoon-related

concerns.

Growth showed signs of moderation in Q1 of 2011-12. Downside risks have increased as a

result of forecast of sub-normal monsoon, global growth entering into a soft patch and

persistence of high inflation. The new base IIP data confirms that industrial growth had not

weakened during H2 of 2010-11, though it decelerated thereafter. The services sector had also

maintained its momentum of growth, although its growth stayed below the pre-crisis rate.

Going forward there could be some impact on growth from high input prices, high inflation

and higher interest rates, but the economy is still likely to grow close to its trend.

1


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I.6 In June 2011, the India Meteorological

Department (IMD) revised its earlier forecast

of a normal South-West monsoon for 2011 from

98 per cent of the Long Period Average (LPA)

to below normal at 95 per cent of the LPA. The

downside risks have thus increased, but the

downward revision is only marginally lower

than the normal range of 96-104 per cent of

LPA. Therefore, it may not have a dampening

effect on the performance of the kharifcrops

provided the spatial distribution of rainfall

continues to remain satisfactory. There has been

timely arrival and advancement of the monsoon

during the year so far and the IMD has forecast

an equitable spatial distribution over the four

homogeneous regions in the range of 94-97 per

cent of the LPA.

1.7 For the country as whole, rainfall duringJune 1-July 20, 2011 was 1 per cent below the

LPA, compared with 14 per cent below the LPA

in the corresponding period of the previous year.

The Reserve Banks Production (foodgrains

weighted) Rainfall Index (PRN) stood at 104

per cent for the period June 1, 2011 to July 20,

2011, compared with 87 per cent in the same

period of the previous year, while the IMD

rainfall index (area weighted) was 99 (Chart

I.2). Kharif sowing with respect to rice,

sugarcane, and jute and mesta as on July 22,

2011, was higher than the corresponding period

Chart I.1: GDP Growth and Trend

Per

cent

b: Non-Agricultural GDP Growth Trend

Non-Agricultural GDP Growth Non-Agricultural GDP Growth Trend

0.0

2.0

4.0

6.0

8.0

10.0

12.0

a: GDP Growth Trend

Per

cent

GDP Growth GDP Growth Trend

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1997

-98:Q

1

1997

-98:Q

3

1998

-99:Q

1

1998

-99:Q

3

1999

-00:Q

1

1999

-00:Q

3

2000

-01:Q

1

2000

-01:Q

3

2001

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1

2001

-02:Q

3

2002

-03:Q

1

2002

-03:Q

3

2003

-04:Q

1

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-04:Q

3

2004

-05:Q

1

2004

-05:Q

3

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-06:Q

1

2005

-06:Q

3

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1

2006

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-08:Q

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1

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-09:Q

3

2009

-10:Q

1

2009

-10:Q

3

2010

-11:Q

1

2010

-11:Q

3

1997

-98

:Q1

1997

-98

:Q3

1998

-99

:Q1

1998

-99

:Q3

1999

-00

:Q1

1999

-00

:Q3

2000

-01

:Q1

2000

-01

:Q3

2001

-02

:Q1

2001

-02

:Q3

2002

-03

:Q1

2002

-03

:Q3

2003

-04

:Q1

2003

-04

:Q3

2004

-05:Q

1

2004

-05:Q

3

2005

-06

:Q1

2005

-06

:Q3

2006

-07:Q

1

2006

-07:Q

3

2007

-08

:Q1

2007

-08

:Q3

2008

-09

:Q1

2008

-09

:Q3

2009

-10

:Q1

2009

-10

:Q3

2010

-11

:Q1

2010

-11

:Q3

Table I.1 : Sectoral GDP Growth (Base: 2004-05)(Per cent)

Item 2009- 2010- 2009-10 2010-11

10* 11# Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1 2 3 4 5 6 7 8 9 10 11

1. Agriculture & allied activities 0.4 6.6 1.8 1.2 -1.6 1.1 2.4 5.4 9.9 7.5

2. Industry 8.3 7.8 2.9 6.3 10.0 13.7 11.3 9.0 6.2 5.3

2.1 Mining & quarrying 6.9 5.8 6.9 6.6 5.2 8.9 7.1 8.2 6.9 1.7

2.2 Manufacturing 8.8 8.3 2.0 6.1 11.4 15.2 12.7 10.0 6.0 5.5

2.3 Electricity, gas & water supply 6.4 5.7 6.2 7.5 4.5 7.3 5.6 2.8 6.4 7.8

3. Services 9.7 9.2 8.5 10.8 9.2 10.1 10.3 9.5 8.6 8.6

3.1 Construction 7.0 8.1 5.4 5.1 8.3 9.2 7.7 6.7 9.7 8.2

3.2 Trade, hotels, restaurants,

transport and communication etc 9.7 10.3 5.4 8.2 10.8 13.7 12.6 10.9 8.6 9.3

3.3 Financing, insurance, real estate

and business services 9.2 9.9 11.5 10.9 8.5 6.3 9.8 10.0 10.8 9.03.4 Community, social &

personal services 11.8 7.0 13.0 19.4 7.6 8.3 8.2 7.9 5.1 7.0

4. GDP at factor cost (total 1 to 3) 8.0 8.5 6.3 8.6 7.3 9.4 9.3 8.9 8.3 7.8

*: Quick Estimates. #: Revised Estimates.

Source: Central Statistics Office.


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Output

of the previous year, while that for pulses,

cereals and cotton was lower. The picture will

become clearer in the weeks ahead.

Storage augmentation, reform of foodsecurity strategy needed

I.8 Against the backdrop of record

procurement and food stocks, augmentation of

storage capacity and reform of the food security

strategy need urgent attention. Agricultural

production has improved in recent years.

However, certain structural bottlenecks such as

inadequate storage capacity, inefficient supply-

chain and marketing infrastructure are

constraining the sector. With a record rabi

production in 2010-11, there was unprecedented

level of procurement during April-July 2011

(Chart I.3). Food stocks reached a record high

of 65.6 million tonnes on June 1, 2011, which

is more than twice the buffer stock norm and

food security reserve requirement. This also

exceeds the existing storage capacity in the

country. Pending the implementation of the

proposed National Food Security Bill, which

may further increase the procurement

requirement, failure to fast-track the existing

Chart I.2: PRN Index IMD Indexvis-a-vis

60

70

80

90

100

110

120

130

140

8-J

un

15

-Jun

22

-Jun

29

-Jun

6-J

ul

13

-Ju

l

20

-Ju

l

27

-Ju

l

3-A

ug

10

-Aug

17

-Aug

24

-Aug

31

-Aug

7-S

ep

14

-Sep

21

-Sep

30

-Sep

IMD 2010 IMD 2011 PRN 2010

PRN 2011 Threshold

Table I.2: Agriculture Production andKharifArea Sown(Area in Million hectares; Production in Million tonnes)

Crop Sowing as on July 22 Production

Normal 2010 2011 Per cent of Final 4th Advance

Normal 2011 2009-10 Estimates2010-11

1 2 3 4 5 6 7

Rice 39.4 15.4 15.5 39.3 89.1 95.3

(0.6) (7.0)

Total Coarse Cereals 22.0 14.1 12.5 56.8 33.6 42.2

(-11.3) (25.6)

Total Cereals 61.3 29.6 28.0 45.7 203.5 223.5

(-5.4) (9.8)

Total Pulses 10.6 4.9 4.5 42.5 14.7 18.1

(-8.2) (23.1)

Total Foodgrains 72.0 34.5 32.5 45.1 218.1 241.6

(-5.8) (10.8)

Total Nine Oilseeds 17.7 13.0 13.0 73.4 24.9 31.1

(0.0) (24.9)

Cotton # 9.4 9.7 9.3 99.0 24.2 33.4

Jute & Mesta ## 0.9 0.8 0.9 100.0 11.8 10.6

Sugarcane (Cane) 4.6 4.9 5.2 113.0 292.3 339.2

All Crops 104.6 62.9 61.0 58.3 - -(-3.0)

-: Nil/Not Available. #: Million bales of 170 kgs. each ##: Million bales of 180 kgs. each.

Note: Figures in parentheses are percentage change over previous year.

Source: Ministry of Agriculture, Government of India.

Chart I.3: Food Stock and its Determinants

Million

tonnes

Million

tonnes

0

5

10

15

20

25

30

35

Stock (RHS)Procurement

Off-take Quarterly Norm (RHS)

Note: 1. Data for off-take is up to March 2011 and stock up to June 2011.2. Procurement and off-take data are monthly figures.3. Procurement for July 2011 is as on July 20.

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

July-11

0

10

20

30

40

50

60

70


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projects and initiate new projects on augmenting

storage capacity will lead to continued and

increasing wastage and losses.

Need for improving post-harvestmanagement of perishable crops

I.9 With respect to fruit and vegetables, the

country is estimated to be losing about 40 per

cent of the yearly produce on an annual basis

due to lack of storage, cold chain and transport

infrastructure. The seasonality and perishability

of these items further magnify the demand-

supply gap, which manifests in erratic

movements in prices. This underscores the need

to strengthen the existing schemes of clusters,

cold-chains and transportation facilities.

Robust industrial growth in 2010-11, somemoderation in early 2011-12

I.10 The new series of the IIP, with base 2004-

05 that was released in June 2011 reinforced

the Reserve Banks view that the industrial

growth had not significantly moderated in H2

of 2010-11. The new series gives better

coverage and is more representative of the

recent production structure based on 399 item

groups as against 303 under the old base. The

new series suggests that the recovery from the

industrial downturn induced by the global

financial crisis further consolidated in 2010-11,

with IIP growth accelerating to 8.2 per cent from

5.3 per cent in the preceding year (Table I.3).

I.11 Industrial growth, however, moderated in

April and May 2011 and turned out to be the

lowest since September 2010. The deceleration

is particularly strong for mining and

manufacturing sectors. While lower growth in

mining reflects the shortages in coal production,

14 out of the 22 industry groups that comprise

manufacturing witnessed a deceleration. The

slowdown in IIP growth during April-May 2011

can be partly attributed to the high base.

Seasonal factors do not seem to have

contributed to this deceleration (Chart I.4).

Table I.3: Index of Industrial Production Sectoral and Use-Based

Classification of Industries(Per cent)

Industry Group Weight Growth Rate Weighted Contribution #

in the Apr-Mar Apr-May Apr-March Apr-May

IIP 2010-11 2010-11 2011-12 P 2010-11 2010-11 2011-12 P

1 2 3 4 5 6 7 8

Sectoral

Mining 14.2 5.2 8.5 1.3 7.4 9.3 2.7

Manufacturing 75.5 8.9 11.6 6.0 86.7 85.2 83.8

Electricity 10.3 5.5 6.3 8.4 6.0 5.6 13.4

Use-based

Basic Goods 45.7 6.0 6.4 7.0 29.2 24.7 49.4

Capital Goods 8.8 14.9 25.2 6.6 25.5 28.0 15.9

Intermediate Goods 15.7 7.3 11.8 2.6 12.4 15.3 6.6

Consumer Goods (a+b) 29.8 8.4 10.5 4.9 33.0 32.0 28.0

a) Consumer Durables 8.5 14.1 19.0 4.5 24.0 24.5 11.8

b) Consumer Non-durables 21.3 4.1 4.3 5.3 9.0 7.5 16.2

General 100.0 8.2 10.8 5.7 100.0 100.0 100.0

P : Provisional. # : Figures may not add up to 100 due to rounding off.

Source: Central Statistics Office.

Chart I.4: Industrial Growth (Y-o-Y, per cent)

-10.0

-5.0

0.0

5.0

10.0

15.0

Apr-09

Jun-0

9

Aug-0

9

Oct-09

Dec-0

9

Feb-1

0

Apr-10

Jun-1

0

Aug-1

0

Oct-10

Dec-10

Feb-1

1

Apr-11

IIP 3-month Moving Average Seasonally Adjusted IIP


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5

Output

Manufacturing growth has turned morebroad-based

I.12 The acceleration in IIP growth in 2010-11

was accompanied by more broad-based growth.The bottom 17 industries registered improved

growth performance in 2010-11 compared to

the previous year and their contribution to

growth more than doubled (Chart I.5). The IIP

data for April-May 2011 indicates continuation

of this trend.

I.13 The Reserve Banks truncated measure of

IIP1 (ex-volatile items) based on new series

exhibits movements similar to the overall IIP

in the recent months, suggesting broad-based

industrial growth (Chart I.6).

Subdued growth in some core industries adrag on overall industrial growth

I.14 The core sector growth decelerated in

2010-11 led by decline in coal production,

stagnation in fertiliser and deceleration in

production of electricity, cement and natural

gas. The deceleration has continued in 2011-

12, with lower growth during April-May 2011

compared to the corresponding period of the

previous year (Chart I.7). Natural gas

production declined mainly on account of lower

production from the Krishna-Godavari basin.

As a corollary of the revision in the base year

of IIP, the base for computing the index of the

core infrastructure sector has also been revised

to 2004-05 from 1993-94. With the addition of

natural gas and fertilisers, the core infrastructure

sector now has eight industries with a combinedweight of 37.9 in the IIP.

Capacity utilisation firms up

I.15 Capacity pressures are building up in the

economy. Capacity utilisation, an indicator of

demand pressure, was the highest in three years

during the fourth quarter of 2010-11 (Chart I.8).

Increase in capacity utilisation during Q4 of

2010-11 was observed in 17 out of 22 industries

covered under the Order Book, Inventory and

Capacity Utilisation Survey (OBICUS). The

order books of machinery and equipment, basic

metal, textiles and cement firms increased

during the quarter.

Chart I.5: Growth Concentration in Manufacturing Sector

a. Growth b. Relative Contribution to Growth

82.7

16.2

63.7

47.652.3

36.2

-40

-20

0

20

40

60

80

100

2009- 10 2010- 11

Top 5 industr ie s Bottom 17 industr ie s

Per

cent

19.1

1.0

22.4

4.3

21.1

3.6

-3

2

7

12

17

22

27

Apr-May 2011-12 2009-10 2010-11

Top 5 industr ie s Bottom 17 industr ie s

Per

cent

Apr-May 2011-12

1 Computed by excluding top 10 and bottom 10 volatile items in terms of growth (out of 399 sub-item groups of IIP) that may at times

tend to undermine the overall momentum of IIP.

Chart I.6: IIP Truncated Index

Per

cent

4

5

6

7

8

9

10

11

12

13

14

Apr-10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-1

0

Nov-1

0

Dec-10

Jan-1

1

Feb-1

1

Mar-1

1

Apr-11

IIP growth rate Truncated IIP growth rate


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6

Services sector sustains momentum

I.16 The services sector growth of 9.2 per cent

in 2010-11 was only marginally lower than thatin the previous year. This was largely due to

deceleration in community, social and personal

services reflecting fiscal consolidation

undertaken by the government. The main drivers

of growth in the service sector during the year

were trade, hotels, transport, storage and

communication and financing, insurance, real

estate and business services. Most of the lead

indicators of services sector such as growth in

tourist arrivals, railway freight traffic, cargo

handled at major ports and passengers handled

at international terminals showed sustained

momentum. The number of cell phoneconnections and cement production, however,

declined (Table I.4).

Unemployment shows declining trend

I.17 The 66th Round of Employment/

Unemployment Survey of the National SampleSurvey Office (NSSO) shows that the overall

unemployment rate, measured by current daily

status, declined to 6.6 per cent in 2009-10 from

8.2 per cent in 2004-05. The quarterly quick

surveys of employment situation conducted by

the Labour Bureau to study the impact of the

global economic slowdown on employment in

the Indian economy indicate that employment

has increased in the recent period in major

industries. As per the quarterly surveys of

employment situation in eight major industries,

employment increased by 9.8 lakh in 2010-11in the industries surveyed. The IT/BPO sector

accounted for 68 per cent of the increase during

Chart I.7: Growth in Infrastructure Industries

April-May 2010-11 April-May 2011-12

Per

cent

Cru

de

Oil

Re

finery

Pro

ducts

Coa

l

Electricity

Cement

Stee

l

Overa

ll

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Natura

lG

as

Fert

ilisers

Chart I.8: OBICUS (Capacity Utilisation)

Capacity Utilisation

Per

cent

68

70

72

74

76

78

2008

-09:Q

1

2008

-09:Q

2

2008

-09:Q

3

2008

-09:Q

4

2009

-10:Q

1

2009

-10:Q

2

2009

-10:Q

3

2009

-10:Q

4

2010

-11:Q

1

2010

-11:Q

2

2010

-11:Q

3

2010

-11:Q

4

Table I.4: Indicators of Services Sector Activity

(Growth in per cent)

Services Sector Indicators 2009-10 2010-11 April 2010 April 2011

1 2 3 4 5

Tourist arrivals 5.7 8.3 6.3# 10.6#

Cement 10.5 4.5 8.7$ -1.7$

Steel 6.0 8.9 10.9$ 5.5$

Railway revenue earning freight traffic 6.6 3.8 3.2 7.4

Cell phone connections 47.4 18.0 42.0 -9.1

Cargo handled at major ports 5.8 1.6 2.7 6.3

Civil aviation

Export cargo handled 11.4 13.4 13.1 6.0Import cargo handled 8.1 20.6 29.9 14.6

Passengers handled at international terminals 5.7 11.5 6.9 18.1

Passengers handled at domestic terminals 14.5 16.1 27.0 14.0

# : Data pertain to April-June. $: Data pertain to April-May.

Source: Ministry of Tourism; Ministry of Statistics and Programme Implementation and CMIE.


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7

Output

Table I.5 : Changes in Estimated Employment

(in lakh)

Industry/Group 2010-11:Q1 2010-11:Q2 2010-11:Q3 2010-11:Q4 2010-11

1 2 3 4 5 6

Textiles including apparels -0.63 2.45 0.40 -1.21 1.01

Leather 0.21 0.04 0.16 -0.08 0.33

Metals 0.45 0.27 0.00 0.16 0.88

Automobiles 0.51 0.29 0.18 0.13 1.11

Gems and jewellery 0.04 0.04 -0.10 -0.02 -0.04

Transport -0.21 0.13 -0.01 0.06 -0.03

IT/BPO 1.29 1.08 1.41 2.87 6.65

Handloom / Powerloom -0.03 0.06 0.03 -0.18 -0.12

Overall 1.62 4.35 2.07 1.74 9.79

Source: Tenth Quarterly Quick Employment Survey, January-March 2011, Labour Bureau.

the year, with the bulk of the increase occurring

during the fourth quarter (Table 1.5).

Some moderation in growth expected in

2011-12I.18 Growth in 2011-12 is likely to moderate

compared with the growth in 2010-11. Despite

the scaling down of the monsoon forecast to

slightly below normal in 2011-12, agriculture

growth is expected to stay broadly on track.

Near-normal monsoon performance will,

however, be an important factor for sustaining

robustness of growth in 2011-12. There is

evidence of continued strong growth in the

services sector. Fiscal consolidation undertaken

by the government is likely to further pull downgrowth in community, social and personal

services. There is possibility of some softening

in the industrial sector which is faced with high

input cost pressures and escalating cost of

capital. Given that non-agricultural GDP growth

was below trend in 2010-11, a further softening

poses downside risk to growth.


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Investment soft patch continues

II.1 Expenditure side data of GDP indicates a

significant slowdown in gross fixed capital

formation, as well as inventory formation during

Q4 of 2010-11 (Table II.1). While these numbers

could be possibly revised, there is evidence to

suggest that investment entered a soft patch

II. AGGREGATE DEMAND

during H2 of 2010-11. Updated information on

corporate investment intentions, as captured by

projects sanctioned financial assistance by

banks and financial institutions, suggest that

project expenditure on new projects, that were

sanctioned assistance, was strong during H1 of

2010-11, but dipped sharply in H2 of 2010-11.

Aggregate demand* decelerated in Q4 of 2010-11 mainly due to investment slowdown. Corporate

investment intentions also moderated significantly during H2 of 2010-11. There are no signs of

improvement in investment during 2011-12 as yet. Private consumption demand may be adjusting

downwards, but still remains strong. Corporate sales growth remained robust during Q4 of

2010-11 and is expected to stay so in Q1 of 2011-12. Profits, however, decelerated in 2010-11

with margins coming under pressure from rising interest and raw material costs. A rebalancing

of demand from government consumption spending to private consumption spending occurred

during 2010-11. Going forward, some rebalancing towards investment is required to sustain

the growth momentum. Though fiscal indicators improved during 2010-11, high growth in

subsidies led to a moderation in GDP at market prices. Despite recent initiatives to downsize

petroleum subsidies, there is a likelihood of fiscal slippage in 2011-12.

8

* Despite well-known limitations, expenditure side GDP data are being used as proxies for components of Aggregate Demand.

Table II.1: Expenditure Side of GDP (Base: 2004-05)

(Per cent)

2009-10 2010-11 2009-10 2010-11

Q.E. R.E.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1 2 3 4 5 6 7 8 9 10 11

(Growth Rate)

Real GDP at Market Prices 9.1 8.8 6.5 7.6 9.2 12.6 9.4 9.1 9.2 7.7

Total Final Consumption Expenditure 8.7 8.0 9.3 12.2 7.4 6.5 8.6 8.5 7.4 7.5

Private 7.3 8.6 7.3 8.5 7.0 6.6 8.9 8.9 8.6 8.0

Government 16.4 4.8 21.3 37.5 9.6 6.2 6.7 6.4 1.9 4.9

Gross Fixed Capital Formation 7.3 8.6 -0.4 0.3 8.7 19.2 17.4 11.9 7.8 0.4

Change in Stock 90.8 7.4 78.9 86.1 95.4 102.1 11.7 9.0 5.1 4.6

Net Exports 10.2 -15.3 5.4 -21.1 15.0 70.8 33.8 14.1 -52.6 -34.8

(Share in GDP)

Total Final Consumption Expenditure 70.1 69.5 73.1 71.4 73.6 63.2 72.6 71.0 72.3 63.1

Private 58.5 58.3 61.8 60.2 60.5 52.4 61.6 60.1 60.1 52.6

Government 11.6 11.2 11.3 11.2 13.1 10.8 11.0 10.9 12.2 10.5

Gross Fixed Capital Formation 32.0 32.0 30.4 31.9 30.9 34.5 32.6 32.7 30.5 32.1

Change in Stock 3.5 3.5 3.5 3.6 3.5 3.5 3.6 3.6 3.3 3.4

Net Exports -7.2 -5.6 -6.3 -7.3 -8.8 -6.5 -7.7 -7.6 -3.8 -3.9

Memo: (` crore)

Real GDP at Market Prices 48,69,317 52,98,129 11,12,318 11,37,985 12,55,040 13,63,974 12,17,270 12,41,332 13,70,188 14,69,339

Q.E.: Quick Estimates. R.E. : Revised Estimates.

Note: As only major items are included in the table, data will not add up to 100.

Source: Central Statistics Office


19/62

9

Aggregate Demand

While the envisaged corporate investment in

2010-11 was marginally higher than that in the

previous year, the slowdown was perceptible

with a 43 per cent drop in the second half from

the level of first half of 2010-11.

II.2 This slowdown since Q3 of 2010-11 is a

concern, requiring some rebalancing of

aggregate demand towards investment. In 2010-

11, 796 projects were sanctioned assistance for

planned project expenditures of 4,60,000 crore

versus 754 projects that were sanctioned

assistance in 2009-10 for planned project

expenditures of`4,56,000 crore. Corporate

investments are driven by the power sector

followed by metal and metal products and

telecommunication and have still not become

broad-based. While some adverse impact oninvestment may come from high interest rates

that have become necessary to combat inflation,

better implementation can help in improving

investment. The Government has made clear its

intentions to remove constraints in investment

and also encourage FDI in certain sectors such

as multi-brand retail.

Private consumption demand deceleratesbut remains strong

II.3 The drivers of growth from the

expenditure side revealed the continuedpredominance of private final consumption

expenditure (PFCE). The buoyancy in private

consumption was largely driven by improved

agriculture growth and support from the

consumer durables segment (Table II.1).

Corporate sales growth remains robust but profits moderate

II.4 Reflecting strong private consumption

demand, sales of non-government non-financial

(NGNF) listed companies grew by around 20

per cent during 2010-11 as also in the fourth

quarter of the year (Table II.2). Further, inanticipation of better demand, companies

accumulated stocks leading to a rise in stock-

in-trade to sales ratio (Chart II.1). Operating

profits and net profits, however, decelerated in

2010-11, due to higher input and interest costs.

With decline in profit margins and increase in

interest outflow, the interest coverage ratio,

Table II.2: Corporate Sector- Financial Performance

(Per cent)

2009-10 2010-11 2009-10 2010-11

(P)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1 2 3 4 5 6 7 8 9 10 11

No. of Companies 2196

Growth rates in per cent

Sales 12.8 19.7 -0.8 0.6 23.0 29.8 25.3 19.2 17.1 19.9

Other Income* 15.5 3.8 51.5 3.4 7.8 8.3 -23.0 56.2 8.4 -24.7

Expenditure, of which 10.6 22.3 -4.8 -2.3 20.6 30.9 29.8 20.5 19.1 22.4

Raw Material 13.2 25.7 -13.8 -4.2 33.5 43.7 37.7 21.5 19.7 26.6

Staff Cost 8.5 18.4 8.4 6.3 5.3 14.0 16.3 20.0 20.5 20.0

Operating Profits (PBDIT) 27.8 11.5 6.7 14.4 59.3 39.4 15.4 7.8 10.5 14.6

Depreciation 22.0 15.3 22.4 21.2 23.2 21.2 20.2 16.7 13.1 13.3

Interest -3.8 20.0 5.5 -0.2 -13.6 -3.9 29.9 5.7 21.9 29.5

Net Profits (PAT) 32.4 7.5 7.6 12.9 91.0 43.4 1.6 9.2 9.1 11.9

Ratios in per cent

Change in stock# to Sales 1.0 1.7 0.4 1.6 0.7 0.6 2.2 0.8 1.2 1.7

PBDIT to Sales 16.8 15.7 17.5 17.3 16.8 15.9 16.2 15.6 15.9 15.1

PAT to Sales 9.4 8.5 10.4 9.5 9.0 9.1 8.5 8.6 8.3 8.4

Interest to Sales 2.6 2.6 2.7 2.9 2.6 2.3 2.9 2.6 2.7 2.5

Interest to Gross Profits 17.6 19.6 17.2 19.8 17.6 16.1 21.1 19.1 19.7 19.1Interest Coverage (Times) 5.7 5.1 5.8 5.1 5.7 6.2 4.8 5.2 5.1 5.2

* : Other income excludes extraordinary income/expenditure if reported explicitly.

# : For companies reporting this item explicitly.

PBDIT : Profit before depreciation, interest and tax. PAT : Profit after tax.

Note : Growth rates are percentage changes in the level for the period under reference over the corresponding period of the previous year for

common set of companies.


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10

which indicates the number of times gross

profits cover the interest payment, also declined

in 2010-11 compared to the previous year.

Earnings forecasts for Q1 of 2011-12, suggesta robust top line growth, indicating that the

demand environment remains good. However,

margin compression may decelerate profits

somewhat. Early results are broadly in line with

these expectations (Table II.3).

External demand improves, but

uncertainty remains

II.5 There has been some improvement in net

external demand during Q4 of 2010-11. With

exports growing at a faster pace than imports,

the extent of negative contribution of net exports

to GDP declined. Going forward, there is some

uncertainty about external demand given the

renewed global growth concerns, but typically,

external demand has been a small contributor

to aggregate demand in India.

Improvement in deficit indicators augurs

well for growth rebalancing

II.6 Provisional accounts of the Central

government for 2010-11 turned out to be

significantly better than the revised estimates

(RE). Key deficit indicators showed an

improvement over the RE reflecting higher

realisation of tax and non-tax revenues andlower plan expenditure for both revenue and

capital components. Preliminary indications are

that the combined fiscal deficit of the Centre

and States had narrowed to 7.7 per cent of GDP

in 2010-11 (Tables II.4 and II.5). The combined

revenue deficit had also fallen significantly. The

higher than anticipated revenues in 2010-11

were utilised by the Centre for financing

increased outlays in key priority areas (rural

infrastructure, implementation of the Right to

Education Act, plan assistance to States and

recapitalisation of public sector banks).

Subsidies likely to overshoot budget

estimates

II.7 Notwithstanding improvements during

2010-11 concerns about possible fiscal slippage

Chart II.1: Sales Growth and Stock-in-Trade to Sales Ratio

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42009-10 2010-11

Percen

t

Percen

t

Change in stock in trade to Sales Sales growth (right scale)

-1

4

9

14

19

29

0.0

1.0

1.5

2.0

2.5

3.0

0.5

24

Table II:3 Early Results for Q1:2011-12

2010-11 2011-12Q1 Q4 Q1

1 2 3 4

No. of companies 127

Growth rates in per cent

Sales 27.3 26.1 27.1

Other Income* -15.1 17.3 85.4

Expenditure, of which 35.8 29.6 25.0

Raw Material 50.9 34.9 29.8

Staff Cost 15.4 25.8 26.3

Operating Profits (PBDIT) 16.2 23.5 24.4

Depreciation 5.1 26.1 27.4

Interest 26.8 26.6 14.6

Net Profits (PAT) 12.4 33.8 29.2

Ratio in per cent

Change in stock# to Sales 4.6 1.5 2.2

PBDIT to Sales 18.7 19.3 18.3

PAT to Sales 13.1 15.1 13.3

Interest to Sales 1.3 1.2 1.2Interest to Gross Profits 7.4 6.1 6.6

Interest Coverage (Times) 13.5 16.3 15.1

# : For companies reporting this item explicitly.

* : Other income excludes extraordinary income/expenditure if

reported explicitly.

Note : Provisional data.


21/62

11

Aggregate Demand

Table II.4 : Key Fiscal Indicators

(Per cent to GDP)

Year Primary Deficit Revenue Deficit Gross Fiscal deficit Outstanding Liabilities

1 2 3 4 5

Centre

2009-10 3.1 5.2 6.4 53.7

2010-11 RE 2.0 3.4 5.1 49.9

(1.7) (3.1) (4.7)

2011-12 BE 1.6 3.4 4.6 48.5

States*

2009-10 1.1 0.5 2.8 22.7

2010-11 RE 0.9 0.3 2.5 21.0

2011-12 BE 0.6 -0.2 2.1 20.6

Combined

2009-10 4.5 5.7 9.2 68.9

2010-11 RE 3.2 3.7 7.7 64.0

2011-12 BE 2.4 3.3 6.8 62.7

RE: Revised Estimates. BE: Budget Estimates.

* : Data in respect of States pertains to 24 State governments of which four are Vote on Accounts.

Note: Figures in parentheses are from the provisional accounts released by the Controller General of Accounts on May 31, 2011.

Source: Budget documents of the Central and State Governments.

Table II.5 : Combined Finances

Item Growth rate ( per cent) Per cent to GDP

2 009-1 0 2010-11 (RE) 2011-12 (BE) 2009 -10 2010-11 (RE) 2011-12 (BE)

1 2 3 4 5 6 7

1. Total Expenditure 15.8 21.7 6.5 28.0 28.4 26.5

2. Revenue Expenditure 16.4 20.0 6.4 23.9 23.9 22.3

3. Capital Expenditure 12.2 32.2 7.3 4.1 4.5 4.2

4. Non-Developmental Expenditure 20.7 14.3 9.9 11.7 11.1 10.7

5. Development Expenditure 12.5 26.9 4.1 16.0 16.9 15.4

6. Revenue Receipts 8.4 32.6 7.7 18.3 20.1 19.0

i) Tax Revenue (net) 6.3 25.6 17.1 15.0 15.6 16.1

ii) Non-tax Revenue 18.8 63.9 -25.0 3.3 4.5 3.0

during 2011-12 remain. The governments

budgetary stance of expenditure-driven fiscal

correction for 2011-12 was viewed as a move

towards fiscal consolidation and anchoring

inflation expectations. However, the lower gross

fiscal deficit (GFD)-GDP ratio budgeted for

2011-12 is challenging on account of sizeable

upside risks to subsidies and downside risks to

revenues from moderation in growth.

II.8 Although the petroleum subsidy has been

budgeted lower in 2011-12 than the RE for

2010-11, the actual level of petroleum subsidy

is expected to exceed the budgeted level for

2011-12. It could overshoot by about 0.5 per

cent of GDP even after partial upward revision

in domestic prices of diesel, PDS kerosene and

domestic LPG in June 2011 as the under-

recoveries could still be close to `1,10,000

crore. Furthermore, payments undertaken for

compensation of under-recoveries of oil

marketing companies for the fourth quarter of

2010-11 would also add another 0.2 per cent of

GDP to the subsidy burden of the current fiscal

year. The elimination/reduction of customs/

excise duty on petroleum products is estimated

to also cause revenue losses to the Centre to

the extent of nearly 0.3 per cent of GDP and

impact the fiscal balance of the Central

government. The total fiscal slippage for the

Centre from oil sector, could thus be about 1

per cent of GDP. In addition, there could be

spillover in fertiliser subsidies. Therefore, for

durable correction in revenue account, tax

buoyancy must recover to the pre-crisis level


22/62


12

and administered pricing of diesel, kerosene and

LPG needs to be phased out at the earliest.

Besides, fertiliser subsidies need to be

contained.II.9 During April-May 2011, the revenue

deficit and the GFD of the Central government

turned out to be higher than during the

corresponding period of the previous year

mainly due to decline in revenue receipts. Lead

information for the first quarter of 2011-12

indicates that although gross direct tax

collections have increased, the substantial

amount of corporation tax refunds have resulted

in a decline in net tax collections over April-

June 2010.

State finances appear to be on track

II.10State governments also reverted to the

process of fiscal consolidation in 2010-11, after

a setback during 2008-10. The RE for 2010-11,

based on the 2011-12 budgets of 24 States

received so far, confirms that at the consolidated

level, States could broadly achieve the budgeted

reduction in key deficit ratios in 2010-11. This

indicates increasing credibility of State

governments commitment towards fiscal

consolidation.

II.11 A disaggregated analysis shows that thebudgeted improvement in revenue account of

States in 2011-12 is mainly due to decline in

revenue expenditure while revenue receipts-

GDP ratio is expected to remain stable at 11.7

per cent. However, the moderation in revenue

expenditure growth is attributable to a sharp

deceleration in growth of development

expenditure (comprising social and economic

services) to 9.0 per cent in 2011-12, from 26.0

per cent in 2010-11 (RE). In line with the

improvement in the revenue account, States

GFD-GDP ratio is budgeted to be lower in 2011-

12. However, capital outlay to GDP ratio,budgeted at 2.1 per cent in 2011-12, is yet to

revert to the high levels achieved during 2006-

09. With several States reducing their State

levies on petroleum products, there could be

some impact on State finances.

II.12 Overall, States seem to be committed to

bring their finances on a sustainable path in the

medium-term and the present pace of fiscal

consolidation appears to be in tandem with the

path suggested by the Thirteenth Finance

Commission. Thus, the fiscal position of

the States appears encouraging, but thechallenge lies in translating intentions into

outcomes of fiscal consolidation, while not

compromising on the quality of the fiscal

correction process.

Moderation in demand in 2011-12 is likely

II.13 There are chances of further moderation

in both investment and consumption as high

inflation erodes real consumption and

monetary policy actions to restrain demand in

the short run work through the system. The

slowdown in consumption has been restrictedso far to interest rate sensitive sectors like car

sales getting impacted. Some re-balancing of

demand towards investment would be helpful,

and industrial policy action and execution

could go a long way to help bring about

this rebalancing. Firm commitment towards

fiscal consolidation by the government

would also help the rebalancing of aggregate

demand.


23/62

III. THE EXTERNAL SECTOR

CAD moderated in 2010-11

III.1 The CAD moderated significantly during

Q4 of 2010-11 with moderation in trade deficitcoupled with an upturn in net invisibles surplus.Merchandise exports expanded at a faster pacethan imports and the trade deficit shrank inabsolute terms. The turnaround in invisibles wassupported by higher earnings from softwareexports. Accordingly, CAD at 2.6 per cent ofGDP during 2010-11 turned out to be lower than2.8 per cent in 2009-10. Capital flows remainedmoderate and were substantially absorbed bythe CAD. Going forward, the external accountis expected to remain manageable.

Risks to trade as global growth enters a

soft patchIII.2 There are risks to current account arisingfrom global growth entering a soft patch (ChartIII.1a). If growth in advanced economies (AEs)weakens further and the soft patch turns into amore prolonged downturn, exports could facea distinctly tougher climate.

III.3 Global economic activity exhibited signsof slowing down in Q2 of 2011 as downsiderisks increased again. High commodity prices,political strife in the Middle East, theearthquake in Japan, sovereign debt problemsin the Euro zone and rising fiscal and debtproblems in the US took a toll on the levels ofeconomic activity and business and consumerconfidence. Private consumption is expectedto be subdued as oil price hikes in the previousquarters cut into households real incomes. After

GDP growth for US and Japan deceleratedmarkedly in Q1 of 2011(Chart III.1b), PMIs forUS and Euro zone and leading indicators forOECD evidenced a dip.

Divergence between global economic activity

of AEs and EMEs likely to remain in 2011

III.4 IMF has assessed that growth in mostemerging and developing economies (EMDEs)would continue to be strong in 2011.Accordingly, the global economic recoveryremains multi-paced with a further divergencein their growth rates. Moderation in commodityprices, especially oil, and government bondyields do offer hope for an economic turnaroundduring the second half of 2011.

III.5 The termination of QE2 by the US inJune, tightening of monetary policy in the EuroArea and most of the EMEs, and fiscalconsolidation initiatives/austerity measures anddeepening of debt crises in the Euro peripherycould, however, depress global demand.Nonetheless, there remains a possibility of QE3if the US economy fails to regain momentumin the second half of 2011. In the US, fiscal andsovereign debt risks are rising because of theabsence of credible consolidation and reformplans, while in Japan, the fiscal response to theearthquake has raised challenges to medium-

term fiscal sustainability. Risks to capital flows as global fiscal and

sovereign debt risks come to the fore

III.6 There are risks to capital flows to EMEs

arising from the global fiscal and sovereign debt

13

Better than expected performance of exports and invisibles receipts in Q4 of 2010-11 led to a

considerable moderation in the current account deficit (CAD). With strong momentum in exports

continuing during the first quarter, the current account is expected to remain manageable

during 2011-12. Nevertheless, the size of current and capital accounts remains somewhat clouded

in view of uncertain and uneven recovery in advanced economies (AEs), sovereign debt problems

in the Euro zone periphery and volatile movements in global oil prices. While an improvement

in FDI flows during the initial two months of 2011-12 augurs well for the economy, the volatility

of flows, particularly with regard to portfolio investments as also the evolving composition of

flows in favour of debt, remains a concern necessitating constant vigil.


24/62


14

risks. These risks have been evident in the Euro

zone, where stress has come time and again,

compelling multilateral action to bailout privateinvestors by incurring higher sovereign debt.

However, the approach has its limits. It can

precipitate a sovereign debt crisis at some stage.

While simmering fiscal risks and sovereign debt

problems in AEs encourage capital inflows into

EMEs, a full-blown crisis has a contagion risk

that can adversely impact risk appetite and

moderate capital flows all around. While we are

currently seeing a surge in capital flows to India,

net outflows were seen in March 2011,

associated with elevated global risk aversion

and increased concerns about inflation.

World trade recovers to exceed the pre-crisis

high, but may moderate ahead

III.7 Global trade is recovering with the value

of world merchandise trade exceeding the

pre-crisis high of July 2008 for the first time

in March 2011. In value terms, the world trade

was 22.3 per cent higher in the first quarterof 2011 compared to the same period of

2010 (Chart III.1c). On account of downside

risks to growth, world trade growth,

in volume terms, is expected to moderate

in 2011.

World industrial activity is progressing at a

moderate pace

III.8 Industrial output growth once again

decelerated in the first quarter of 2011, after

expanding toward the end of 2010, reflecting

the decline in the Japanese production in March

2011 and similar declines in some of the NorthAfrican countries (Chart III.1d). Excluding

these countries, growth momentum in the rest

of the world has been well above the longer-

term trend growth rate.

Chart III.1: Key Global Indicators

Advanced Economies

Emerging and Developing Economies

World

a: Output Growth

Source: IMF

2007 2008 2009 2010 2011f -4

-2

0

2

4

6

8

10

Per

cen

t

2012f

Source: Eurostat and BEA

b: Real GDP Growth (Quarter-on-Quarter)

US UK Japan

EuroArea EU27

-6

-4

-2

0

2

4

6

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

Per

cent

2010Q4

2011Q1

c: Growth in World Merchandise Exports (Value)

-25

-20

-15

-10

-5

0

5

10

15

20

25

Per

cen

t

-40

-30

-20

-10

0

10

20

30

40

Per

cen

t

Q-on-Q (right scale) Y-on-YSource : WTO

2006Q1

2006Q2

2006Q3

2006Q4

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

2011Q1

d: Growth of Industrial Production (Y-o-Y)

-25

-20

-15

-10

-5

0

5

10

15

20

Per

cen

t

2008

-M-0

1

2008

-M-0

4

2008

-M-0

7

2008

-M-1

0

2009

-M-0

1

2009

-M-0

4

2009

-M-0

7

2009

-M-1

0

2010

-M-0

1

2010

-M-0

4

2010

-M-0

7

2010

-M-1

0

2011

-M-0

1

2011

-M-0

4

High Income Countries Developing CountriesWorld (WBG members)


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15

The External Sector

Exports continue to grow aided by trade

diversification

III.9 Indias merchandise exports during 2011-

12 so far (up to June) continued to registerstrong growth primarily led by engineering,

gems and jewellery and petroleum products.

The resilience in export performance appeared

to have resulted from the supportive government

policy, focussing on the diversification in terms

of higher value-added products in engineering

and petroleum sectors and destinations across

developing economies. Trade policy is

supporting exports through schemes like focus

market scheme (FMS), focus product scheme

(FPS) and duty entitlement passbook scheme

(DEPB). This trend seems to have continued in

the current year as well.

III.10 Disaggregated data that are available up

to February 2011 show that the share of

developing economies in total exports

improved, while the share of OECD countries

declined. Countries like China and South Africa

accounted for nearly 32 per cent of the increase

in share of exports to developing countries. In

terms of products, the share of engineering and

petroleum products increased, while the share

of labour intensive products declined (Chart

III.2 a, b & c). Within engineering goods,

transport equipment, metals and iron and steel

were the major contributors to the rise in exports

during the year.

Trade deficit increases marginally, reflecting

large non-oil imports

III.11 During Q1 of 2011-12, though export

growth continued to outstrip import growth, the

trade deficit increased marginally in absolute

terms. Import growth was primarily led by a

spurt in gold and silver (a rise of 200 per cent)

Chart III.2: India's Merchandise Trade

a: India's Merchandise Trade

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

US$billion

-60

-40

-20

0

20

40

60

80

100

Per

cen

tG

row

th

Apr-

09

Jun

-09

Aug

-09

Oc

t-09

Dec

-09

Fe

b-1

0

Apr-

10

Jun

-10

Aug

-10

Oc

t-10

Dec

-10

Fe

b-1

1

Apr-

11

Jun

-11

E xp or ts I mp or ts Trade Balance (Right Scale)

Chart b: Percentage Shares in Exports

Labour Intensive Sector Chemicals & Related Pdt

Engineering Goods Petroleum Pdt Gems & Jew.

0

10

20

30

40

50

60

1990-91 2000-01 2009-10 Apr-Feb2010-11

Per

cent

c: Percentage Shares in Exports

Per

cent

0

10

20

30

40

50

60

1990

-91

2000

-01

2009

-10

Apr-

Fe

b

2010

-11

OECD Countries OPEC Developing Countries

d: India's POL Imports and International Crude Oil Prices

US$billion

US$per

barre

l

0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

120

140

Apr-

05

Jun

-05

Aug

-05

Oc

t-05

Dec

-05

Fe

b-0

6

Apr-

06

Jun

-06

Aug

-06

Oc

t-06

Dec

-06

Fe

b-0

7

Apr-

07

Jun

-07

Aug

-07

Oc

t-07

Dec

-07

Fe

b-0

8

Apr-

08

Jun

-08

Aug

-08

Oc

t-08

Dec

-08

Fe

b-0

9

Apr-

09

Jun

-09

Aug

-09

Oc

t-09

Dec

-09

Fe

b-1

0

Apr-

10

Jun

-10

Aug

-10

Oc

t-10

Dec

-10

Fe

b-1

1

Apr-

11

Jun

-11

POL Imports Average Price of Indian Basket (right scale)


26/62


16

and machinery (49 per cent). However, growth

in oil imports at 18 per cent has been lower than

that during the corresponding period of theprevious year, reflecting some moderation in

demand (Chart III.2d and Table III.1).

Invisibles remain the mainstay of current

account

III.12 During Q4 of 2010-11, the current

account balance improved further over the

corresponding period of the previous year as

well as the preceding quarter as a result of

continued good performance of both

merchandise and invisibles exports (Table III.2).

Interestingly, the increase in oil exports offset

the increase in oil imports implying that oil trade

balance did not deteriorate further during

2010-11.

III.13 Among invisibles receipts, services

exports showed higher growth primarily due to

software services, travel, transportation andbusiness services. Private transfers remained

buoyant despite uncertainties in MENA

countries (Table III.3).

III.14 A noteworthy aspect in respect of

services data was the release by the Reserve

Bank of provisional aggregate data on

international trade in services for the first time

for the month of April 2011 as a follow up of

the implementation of the recommendations of

the Working Group on Balance of Payments

Manual for India (Chairman: Shri Deepak

Mohanty). Henceforth, the aggregate data ontrade in services will be released on a monthly

basis after a gap of about 45 days.

Table III.1 : Indias Merchandise Trade

(US$ billion)

Item 2009-10 (R) 2010-11 (P) April-June (P)

2010-11 2011-12

Absolute Growth Absolute Growth Absolute Growth Absolute Growth

(%) (%) (%) (%)

1 2 3 4 5 6 7 8 9

Exports 178.2 -2.5 245.6 37.8 54.2 41.2 79.0 45.7

Oil 28.0 1.7 42.5 51.8 8.7 96.8 14.0 60.9Non-oil 150.2 -3.2 203.1 35.2 45.5 33.9 65.0 42.9

Imports 287.4 -3.8 350.5 21.9 84.2 35.0 110.6 31.4Oil 87.1 -7.0 101.6 16.6 25.9 55.3 30.5 17.8

Non-oil 200.3 -2.4 248.9 24.2 58.4 27.6 80.1 37.2

Trade Balance -109.2 -5.9 -104.9 -3.9 -30.0 25.4 -31.6 5.3

Non-Oil Trade Balance -50.1 0.4 -45.8 -8.6 -12.9 9.1 -15.1 17.1

R: Revised. P: Provisional. Source: DGCI&S and Press Release, Department of Commerce Government of India.

Table III.2: Indias Balance of Payments

(US $ billion)

2009-10PR 2010-11P 2009-10 2010-11

Q4PR Q1PR Q2PR Q3PR Q4P

1 2 3 4 5 6 7 8

1. Exports 182.2 250.5 52.5 55.3 52.0 65.9 77.2

2. Imports 300.6 380.9 84.1 87.2 89.3 97.4 107.1

3. Trade Balance (1-2) -118.4 -130.5 -31.6 -31.9 -37.3 -31.5 -29.9

4. Net Invisibles 80.0 86.2 18.8 19.8 20.5 21.5 24.5

5. Current Account Balance (3+4) -38.4 -44.3 -12.8 -12.1 -16.8 -10.0 -5.4

6. Gross Capital Inflows 345.7 496.0 90.3 94.5 112.1 173.7 115.77. Gross Capital Outflows 292.3 436.3 74.5 77.7 90.8 160.3 107.5

8. Net Capital Account (6-7) 53.4 59.7 15.8 16.8 21.4 13.4 8.2

9. Overall Balance (5+8)# 13.4 13.1 2.1 3.7 3.3 4.0 2.0

# Overall balance also includes errors and omissions apart from items 5 and 8.

PR: Part ially Revised. P: Preliminary.


27/62

17

The External Sector

Capital flows remain buoyant so far

III.15 As per the latest available information

for the period April-May 2011, FDI inflows

increased significantly. The increase in FDI was

largely led by power, healthcare and

pharmaceutical sectors. Net FII flows exhibited

a considerable volatility during 2011-12 so far

(Please see Chapter IV for details). ECB

approvals, however, continued to increase on

the back of strong domestic demand and interest

rate differentials (Table III.4). The volatility in

FII flows warrants a continuous monitoring of

the evolving situation.

III.16 Net capital flows during Q4 of 2010-11

were lower than those during the corresponding

period of the previous year primarily due to areversal in FII flows and lower net FDI flows

(Table III.5). The moderation in inflows under

FDI and short-term trade credits continued

during the quarter. FDI moderated mainly on

account of lower FDI inflows under services

and construction, real estate and mining.

Broad-based REER indices depreciate

moderately during Q1 of 2011-12

III.17 In nominal as well as real terms, broad-

based 30 and 36-currency indicators of effective

exchange rate for rupee depreciated during Q1of 2011-12 (Table III.6). The real effective

Table III.4: Capital Flows in 2011-12 so far

(US $ billion)

Component Period 2010-11 2011-12

1 2 3 4FDI to India April-May 4.4 7.8

FIIs (net) April-July, 15 6.2 3.1

ADRs/GDRs April-June 1.1 0.3

ECB Approvals April-June 5.3 8.1

NRI Deposits (net) April-June 1.1 1.5

FDI : Foreign Direct Investment.

FII : Foreign Institutional Investors.

ADR : American Depository Receipts.

GDR : Global Depository Receipts.

ECB : External Commercial Borrowings.

NRI : Non Resident Indians.

Table III.5 : Net Capital Flows

(US $ billion)

Item April-March January-March

2009-10 (PR) 2010-11 (P) 2009-10 (PR) 2010-11 (P)

1 2 3 4 5

Net Capital flows 53.4 59.7 15.8 8.2

Of which

1. Foreign Direct Investment 18.8 7.1 3.4 0.6Inward FDI 33.1 23.4 6.1 4.9

Outward FDI -14.4 -16.2 -2.7 -4.3

2. Portfolio Investment 32.4 30.3 8.8 0.2

Of which:

FIIs 29.0 29.4 8.5 -0.03

ADR/GDRs 3.3 2.0 0.1 0.23. External Assistance 2.9 4.9 1.0 0.8

4. External Commercial Borrowings 2.8 11.9 0.4 2.45. NRI Deposits 2.9 3.2 -0.6 0.9

6. Short-term Trade Credit 7.6 11.0 4.5 2.7

P: Preliminary. PR: Part ially Revised.

Table III.3: Net Invisibles

(US $ billion)

Item April-March January-March

2009-10 2010-11 2009-10 2010-11

(PR) (P) (PR) (P)

1 2 3 4 5

A. Services 35.7 47.7 8.5 14.5

Of which

Travel 2.5 4.0 0.8 1.3

Transportation -0.8 0.4 -0.5 0.9Software 48.2 56.8 14.0 16.7

Business Services -6.7 -3.8 -1.8 -0.8

Financial Services -0.9 -1.0 -0.4 -0.4B. Transfers (Private) 52.1 53.4 12.6 13.8

C. Income -8.0 -14.9 -2.3 -3.8

Investment Income -7.2 -13.9 -2.0 -3.6Compensation of

employees -0.8 -1.0 -0.3 -0.2

Total (A+B+C) 80.0 86.2 18.8 24.5

PR: Part ially Revised. P: Preliminary.


28/62


18

exchange rate (REER) indices for 6-currency,

however, showed a moderate appreciation,

partly reflecting the higher inflation differential

with the countries covered under the basket.

External debt indicators mixed, reserve

accretion modest

III.18 Indias external debt stock as at

end-March 2011 showed an increase of 17.2 per

cent over the level as at end-March 2010

reflecting increase in ECBs, bilateral and

multilateral borrowings and short-term trade

credit (Table III.7).

III.19 Key debt sustainability indicators suchas debt to GDP ratio and debt service ratio

improved while other indicators showed some

deterioration during 2010-11 on account of the

continued dominance of debt creating flows

(Table III.7 and Table III.8). Debt creating flows

could increase further going forward reflecting

the interest rate differentials in a liquidity surfeit

global economy characterised by multi-paced

recovery as also the recent policy measures

aimed at raising the limit on investments by FIIs

in debt markets. The debt creating flows and

the volatile FII flows need to be monitored

closely to avoid risks emanating from

unforeseen adverse global developments.

International Investment Position deteriorates

III.20 Indias net international liabili ties

increased moderately despite the decline in the

Table III.6: Nominal and Real Effective Exchange Rates-Trade Based

(Base: 2004-05=100)(Per cent, appreciation+/depreciation-)

Index Year-on-Year Variation (Average)

July 15, 2011 P 2008-09 2009 10 P 2010- 11P 2011-12 P( April-June)

1 2 3 4 5 6

36-REER 102.0 -9.9 -3.1 7.7 -0.7

36-NEER 92.5 -10.9 -2.6 2.9 -3.5

30-REER 93.1 -10.2 -4.6 4.5 -0.6

30-NEER 94.1 -8.3 -2.2 1.0 -2.5

6-REER 118.5 -9.3 -0.3 13.1 1.5

6-NEER 90.5 -13.6 -3.7 5.7 -4.3

Rs/USD 44.5 -12.5 -3.1 4.1 2.1

Rs/USD (end-March) 44.7 -21.5 12.9 1.1 -0.2

NEER : Nominal Effective Exchange Rate. REER : Real Effective Exchange Rate. P : Provisional.

Note : Rise in indices indicates appreciation of the rupee and vice versa.

Table III.7: Indias External Debt

(US$ billion)

Item End-March End-March End-March Variation (March 20112009 2010 PR 2011 P over March 2010)

Amount Per cent

1 2 3 4 5 6

1. Multilateral 39.5 42.9 48.5 5.6 13.1

2. Bilateral 20.6 22.6 26.0 3.4 14.93. International Monetary Fund 1.0 6.0 6.3 0.3 4.4

4. Trade Credit (above 1 year) 14.5 16.9 18.6 1.8 10.4

5. External Commercial Borrowings 62.4 70.8 88.3 17.5 24.76. NRI Deposit 41.6 47.9 51.7 3.8 7.9

7. Rupee Debt 1.5 1.7 1.6 -0.1 -3.4

8. Long-term (1 to 7) 181.2 208.7 240.9 32.2 15.49. Short-term 43.4 52.3 65.0 12.7 24.2

Total (8+9) 224.5 261.0 305.9 44.9 17.2

P: Provisional. PR: Part ially Revised.


29/62

19

The External Sector

CAD during Q4 over the preceding quarter. The

increase primarily reflected the valuation effects

due to the depreciation of the US dollar against

major international currencies (Chart III.3).

Oil prices and the pattern of capital flows likely

to determine external balance

III.21 Indias external debt and CAD are likely

to remain manageable over the medium-term.

However, some pressures could emerge with

event risks. The continued diversification in

terms of products and destinations with

supportive policies of the government, however,

augur well for realising Indias export growth

potential over the medium-term. This is also

reflected in the robust performance of exportsduring 2011-12 so far. Services exports are also

likely to remain buoyant.

III.22 Elevated oil prices may have adverse

implications for the import bill necessitating

adoption of energy efficient technology, step-

up in exploration of oil and research on

Table III.8: External Sector Vulnerability Indicators

(Per cent)

Indicator End- End- End- End-

March September December March

2010 2010 2010 2011

1 2 3 4 5

1. Ratio of Total Debt to GDP 18.0 17.3

2. Ratio of Short-term to Total Debt (Original Maturity) 20.0 21.0 20.7 21.2

3. Ratio of Short-term to Total Debt (Residual Maturity) 41.2 42.9 - 42.2

4. Ratio of Concessional Debt to Total Debt 16.8 16.0 15.7 15.6

5. Ratio of Reserves to Total Debt 106.8 101.4 100.5 99.6

6. Ratio of Short-term Debt to Reserves 18.8 20.7 20.6 21.3

7. Reserves Cover of Imports (in months) 11.1 10.4 10.0 9.6

8. Reserves Cover of Imports and Debt Service Payments (in months) 10.5 9.8 9.5 9.2

9. Debt Service Ratio (Debt Service Payments to Current Receipts) 5.5 4.1 4.0 4.2

Chart III.3: International InvestmentPosition

-200

-100

0

100

200

300

400

500

600

700

US$billion

Net Assets Liabilities

Sep-0

8

Dec-0

8

Mar-0

9

Jun-0

9

Sep-0

9

Dec-0

9

Mar-1

0

Jun-1

0

Sep-1

0

Dec-1

0

Mar-11

developing oil substitutes. In an uncertain global

financial and macroeconomic environment,

capital flows can turn more volatile. Afavourable investment climate would be

necessary to further boost FDI inflows

which have recovered in the early months of

2011-12. Overall, the BoP outlook for 2011-12

remains stable though it necessitates a constant

monitoring due to global uncertainties.


30/62

20

Monetary conditions remain tight in line

with policy stance

IV.1 Monetary conditions remained tight

during Q1 of 2011-12 with interest rates firming,

deposit growth picking up and credit growth

decelerating. The Reserve Bank persisted with

its anti-inflationary monetary policy stance

during Q1 of 2011-12. As inflation became

increasingly generalised, the Reserve Bank

raised policy repo rate by 50 bps in May,

followed by another 25 bps in June. The Reserve

Bank has thus raised the reverse repo rate, repo

rate and the CRR by 325 basis points (bps), 275

bps and 25 bps respectively since March 2010.

Following a shift from absorption mode to

injection mode in the liquidity adjustmentfacility (LAF), there has been, in effect, a rise

in policy rates by 425 bps since February 2010

till date as the money market rate started

hovering around the upper bound from the lower

bound of the LAF corridor (Table IV.1).

IV.2 Based on the recommendations of the

Working Group on Operating Procedures of

Monetary Policy (Chairman: Shri Deepak

Mohanty), the Reserve Bank in its Monetary

Policy Statement for 2011-12 effected the

following changes to the operating procedure

of monetary policy: (i) the weighted averageovernight call money rate has become the

operating target of monetary policy; (ii) the repo

rate has become the only independently varying

policy rate; (iii) the reverse repo rate, pegged

IV. MONETARY AND LIQUIDITY CONDITIONS

at 100 bps below the repo rate, provides the

lower bound to the corridor of overnight interest

rate and (iv) a new Marginal Standing Facility

(MSF) has been instituted at 100 bps above therepo rate that provides the upper bound to the

corridor. Banks can borrow overnight from the

MSF up to one per cent of their respective net

demand and time liabilities (NDTL). The new

operating procedure became operational in May

2011.

Liquidity conditions continue to be in

deficit mode

IV.3 Liquidity conditions eased significantly

during Q1 of 2011-12. The average availment

20

Table IV.1: Movements in Key Policy Rates

in India(Per cent)

Effective Since Reverse Repo Rate Cash ReserveRepo Rate Ratio

1 2 3 4

Apr. 21, 2009 3.25 (-0.25) 4.75 (-0.25) 5.00Feb. 13, 2010 3.25 4.75 5.50 (+0.50)Feb.27, 2010 3.25 4.75 5.75 (+0.25)Mar. 19, 2010 3.50 (+0.25) 5.00 (+0.25) 5.75Apr. 20, 2010 3.75 (+0.25) 5.25 (+0.25) 5.75Apr. 24, 2010 3.75 5.25 6.00 (+0.25)Jul. 2, 2010 4.00 (+0.25) 5.50 (+0.25) 6.00Jul. 27, 2010 4.50 (+0.50) 5.75 (+0.25) 6.00Sept. 16, 2010 5.00 (+0.50) 6.00 (+0.25) 6.00Nov. 2, 2010 5.25 (+0.25) 6.25 (+0.25) 6.00Jan. 25, 2011 5.50 (+0.25) 6.50 (+0.25) 6.00

Mar. 17, 2011 5.75 (+0.25) 6.75 (+0.25) 6.00May 3, 2011 6.25 (+0.50) 7.25 (+0.50) 6.00Jun 16, 2011 6.50 (+0.25) 7.50 (+0.25) 6.00

Note: 1. Reverse repo indicates absorption of liquidity and repoindicates injection of liquidity.

2. Figures in parentheses indicate change in policy rates in

percentage points.

Liquidity conditions eased further during Q1 of 2011-12 while remaining in deficit mode. This

brought about an adjustment in liquidity in line with the policy objective. The easing reflected

mainly structural factors, as the divergent trend between credit growth and deposit growth

narrowed with rising interest rates. The sharp rise in currency growth observed during 2010-

11 was also reversed as the opportunity cost of holding currency increased with rise in deposit

rates. Following the pick-up in the deposit growth, the money supply growth remained above

the indicative trajectory. Though credit growth moderated, partly reflecting base effect, it is

still above the indicative trajectory.


31/62

21

Monetary and Liquidity Conditions

of liquidity under LAF was lower at around

`49,300 crore in Q1 of 2011-12 as compared

with around `84,400 crore in Q4 of 2010-11.

The easing was mainly on account of sharp

drawdown in Governments cash balances with

the Reserve Bank. With the Government

transiting to Ways and Means Advances/

Overdraft in early April, reflecting, inter alia,

tax refunds, the liquidity conditions were in

absorption mode for a brief period in early April

2011. As part of their usual year-end balance

sheet adjustments, banks maintained higher

cash reserves with the Reserve Bank, which

following their unloading, also had an easing

effect on liquidity conditions in early April 2011.

IV.4 Liquidity conditions reverted to the

deficit mode in the second week of April 2011.Seasonally, the month of April has mostly seen

surplus liquidity in terms of the net absorption

under LAF, reflecting lower credit demand and

Governments cash draw-down. This year

turned out to be contrarian in that April

experienced liquidity deficit on an average daily

basis (around `19,000 crore, albeit, lower than

that of`81,000 crore in March 2011) (Chart

IV.1). The deficit liquidity conditions were in

line with stated policy objective of the Reserve

Bank. With the Government substituting WMA

by issuances of cash management bills (CMBs)and additional borrowing through Treasury Bills

from the market, the average daily net liquidity

injection under the LAF increased to around

`55,000 crore in May 2011.

IV.5 Even as liquidity was in the surplus mode

during early April 2011, the Reserve Bank had

anticipated reversal in liquidity conditions based

on its liquidity assessment for the subsequent

period. Accordingly on April 8, 2011, the

Reserve Bank had pre-emptively extended the

additional liquidity support to SCBs under the

LAF to the extent of up to one per cent of their

NDTL till May 6, 2011. Moreover, the second

LAF (SLAF) on a daily basis was also extended

up to May 6, 2011. Following the introduction

of MSF on May 9, 2011, where banks can

submit their bids during 15.30 - 16.30 hrs, the

second LAF was discontinued. Further, under

the MSF scheme, banks need not seek a specific

waiver for default in SLR compliance arising

out of use of this facility. Till date the maximum

availment of liquidity under MSF has been

`4,105 crore

IV.6 Liquidity in the banking system remained

in deficit mode in June as Government balances

increased reflecting quarterly advance tax

outflows (Table IV.2). The average daily net

outstanding liquidity injection was around

`74,000 crore in June 2011. Liquidity

conditions eased in early July reflecting

drawdown of Government cash balances

including, inter alia, redemption of a security

amounting to around `37,000 crore on July 2,

2011. The average daily net liquidity injection

is placed at around `41,000 crore during July 1

to 22, 2011.

Reverse RepoAmount RepoAmount GoI Balance with RBI (RHS)

-170000-120000

-70000

-20000

30000

80000

130000

180000

230000

`

crore

`

crore

Chart IV.1: LAF Volumes and GoI Balances

100000

0

50000

100000

150000

200000

-50000

Apr-

01

-09

Apr-

29

-09

May-2

7-0

9

Jun-2

4-0

9

Jul-22

-09

Aug-1

9-0

9

Sep-1

6-0

9

Oc

t-14

-09

macro economic and monetary developments - first quarter review 2011-12

Documents